IGI Logo

Margin expansion to mid-teens on track

We met K M Balaji, CFO. KTAs: 1) Truck volumes, while weak, could potentially improve from H2, aided by a more benign base; mid-to-long term outlook would be driven by sustained economic growth and triggering of replacement-led demand, as fleet-age remains at record levels; DFC not yet seen as a meaningful threat. 2) AL is gaining share in buses/LCVs, with the non-vehicle (spares, defense, and power solutions) business also faring quite well. 3) Sustained pricing discipline (even in the current weak demand scenario), with improving mix/cost controls, gives confidence on mid-teen margin guidance (vs 12% in FY24). Our estimates are unchanged, as also our TP of Rs300/sh; we assign 14x EV/EBITDA + 2x P/B for HLFL, implying 24x Sep-26E PER. AL is one of the least expensive OEMs, with 13% EPS CAGR, net-cash b/s, >25% RoCE.

Truck demand to potentially improve from H2; mid-long term outlook intact

Recent demand trends have been soft, partly due to seasonal factors and adverse base; management expects H2 to be better, aided by a more benign base. Mid-to-long term truck segment outlook would be supported by healthy underlying economic growth, along with industry-specific factors like record-high fleet age. With the bulk of regulatory interventions now behind, the impact of associated costs on prospective demand would also be limited (cost increase for BS-7 trucks to be lesser than that under the BS-4 to BS-6 transition); further, AL does not foresee a meaningful competitive threat from dedicated freight corridors (DFCs) of Indian Railways, as last-mile connectivity here is still missing (in fact seen aiding the ICV segment; latest timeline for completion of the western corridor by Mar-25 seen as highly optimistic by Container Corp).

AL seeing healthy performance in non-trucks and non-vehicle businesses

AL has been performing strongly in buses and emerged as the leader; with a steadystate ICE order book of 2-2.5K units; it is also gaining market share in an overall subdued LCV industry despite addressing only 50% of the market. On the non-vehicle front, spare parts CAGR over the last 2 years is 25%, and is seen further growing 10-15% this year (aided by a high fleet-age); company also expects to clock healthy double-digit growth in Defence this year, with the power solutions business also seen doing well. In EVs, Switch has 1.5K pending orders and has reached breakeven; AL believes any encouragement to EVs under FAME-III would trigger further adoption.

Multiple triggers to potentially accelerate mid-teen margin delivery

Outlook on profitability remains strong, aided by a) price competition remaining under check (discounts declined by Rs20K/unit in Q1 which has sustained in Q2), b) improving mix amid rising share of the margin-accretive non-truck businesses, c) material cost savings initiatives (cumulatively saved Rs20bn over the past 3 years; targets another Rs6.5bn savings this year), d) benign commodity prices; e) operating leverage benefits – may potentially lead to earlier-than-expected delivery on mid-teen margin aspiration.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354